JCK Report – Cut Diamond Conversations

June 1, 1998byRussell Shor

Radical changes are likely in the diamond market here and around the world in the years immediately ahead. There are new challenges to the traditional channels of distribution. Powerful new consumer markets are emerging. Marketable synthetic diamonds are not far off.

Since diamond jewelry accounts for about half of the industry’s U.S. sales, how these changes affect the diamond market is vitally important to everyone in the business.

To get a measure of how the industry thinks about the future, JCK identified some crucial issues facing the industry. Then we asked knowledgeable individuals at different points in the diamond pipeline for their comments on these issues – ones likely to have the greatest impact on the greatest number of people in the long term.

The participants are Stephen Lussier, manager of De Beers’ Consumer Marketing Division, London; Hertz Hasenfeld, a key New York diamond manufacturer and sightholder; Eli Haas, president of ENH International and president of the New York Diamond Dealers’ Club; Ernie Goldberger, Los Angeles, vice president of the Diamond Club West Coast; Russell Cohen, chairman of Carlyle & Co., Greensboro, N.C., a major chain of 77 stores ranging from the very upscale Caldwell’s to the moderately priced Jewel Box; Lee Berg, chairman of Lee Michaels Fine Jewelry in Baton Rouge, La.; and Paul Cohen, president of Continental Jewelers in Wilmington, Del.

“I see no trend to indicate that diamonds are being replaced by other gemstones.” – Eli Haas

Do you foresee major problems with diamond sales and consumer confidence if or when white synthetic diamonds are put on the market?

LUSSIER: These can be a problem if we can’t identify them easily. Synthetics aren’t particularly competitive against natural diamonds because people buy the real thing for their emotional symbolism. The real problem is one of confidence. If there are scandals [in which people are caught passing off synthetics as naturals], it will undermine the confidence of consumers who want to be certain of what they’re buying. That’s why we at De Beers have developed equipment to detect synthetics and [why we] introduced diamond branding as a last line of defense.

HASENFELD: No. As long as you can identify them, they won’t hurt the market. Right now, there are synthetic rubies and emeralds which have not destroyed the markets for those items. As with a work of art, people want the real thing, not an imitation. If you try to give your fiancée a fake diamond, there goes your marriage.

HAAS: As long as it remains relatively easy to differentiate between the synthetic and the natural, there’s little danger that synthetics will threaten the sale of natural diamonds. To date, research conducted by De Beers and GIA has been up to the task of positive identification of synthetics.

GOLDBERGER: No, I don’t. Anybody who wants to buy the real thing will buy the real thing.

RUSSELL COHEN: There’s confusion any time new things come onto the market and, in the shorter term, this may be a concern. Mistakes and fraud could undermine consumer confidence. Over the long term, I’m more concerned about the effect of synthetic diamonds on the lower end of the natural diamond market, under $1,500. In the colored stone area, many stores won’t carry lower-priced natural rubies or sapphires and offer synthetics instead. Many consumers ask, “Why should I spend more for an [unattractive] natural if it’s hard to tell the difference?”

BERG: I believe people will always want to buy a diamond over synthetics. There is a certain mystique to diamonds. The husband wants to give his wife a “badge” of approval that says “we made it.” People will always want to have that.

The biggest problem is with representation. Consumers need to feel confident that what they’re buying is what they’re buying. As long as [the synthetic] is identified and represented properly, I don’t think the consumer will have a problem.

PAUL COHEN: So long as the identification of the synthetic is easy at the jewelry store level – meaning that the gemologist or experienced sales staff who is gemologically astute can perform the identification – then no, it’s not a problem.

Turn the clock back 90 years and ask the same question, only with sapphires. Did synthetic sapphires make a difference in the sapphire market? I don’t think so.

“There is a price ‘breaking point’ [where consumers will choose another gemstone rather than a diamond], but it’s very difficult to know what it is.” – Russ Cohen

Do you believe consumers have a “breaking point” where they would opt for another gem – or something else entirely – if they believe diamonds are too expensive?

LUSSIER: Demand for diamonds is related to price, but we don’t know where that breaking point might be. We at De Beers have spent a lot of time working on supply-demand curves, but it’s very, very difficult to figure accurately because diamonds are perhaps the only things that are infinitely substitutable with one another – that is, varying the size, color, clarity and cut without enormous visual differences – across a broad range of prices. In 1989, for example, we did increase prices too far for the American market so people opted for lower qualities instead of something else. In the end, however, consumers are willing to pay if they perceive value. They don’t want to pay too much.

HASENFELD: In theory, yes. But that would have to be quite a bit higher than [the level prices are at now]. Also, there are so many qualities, sizes and price points that there’ll always be a market for diamonds. It’s just that the demand for size and qualities may shift.

HAAS: I think that the public is firmly wedded to the allure and mystique of diamonds, and I see no trend to indicate that diamonds are being replaced by other gemstones. The enormous range of available qualities and sizes allows every consumer to find a diamond to fit every budget and every price point.

GOLDBERGER: No. They may go for less quality or smaller sizes, but they will always buy diamonds.

RUSSELL COHEN: There is a breaking point but it’s very difficult to know what it is. We have to be careful that someday consumers may say that [diamond prices] don’t make sense. Everyone, regardless of how affluent they are, wants to get good value, and if the day ever comes when consumers feel they aren’t getting it, they’ll change very quickly.

BERG: No, especially when you look at the diamond engagement ring. That is the traditional gift – always has been, and always will be. Price will play a part with relation to size and quality, but people will not want to switch to a sapphire or emerald, or a synthetic substitute.

With other pieces of jewelry, they may be more likely to switch to other gems.

PAUL COHEN: No, I don’t have the sense that diamonds are too expensive, nor will they be. If prices go up 5% a year, which is about the increase in personal income, then it’s not out of line.

Consumers are spending far more on engagement rings now than they did 10 years ago. And there’s no indication that there will be any shift to something else. There’s no reason for it. If diamond prices increased 50% all of a sudden, then maybe we would see something, but this just won’t happen. De Beers functions logically, gradually increasing prices every year.

“As the Internet becomes a household tool, diamonds, like every other consumer and business item, will be more heavily traded on the Internet.” – Hertz Hasenfeld

Do you believe that Internet diamond sellers eventually will capture a lion’s share of certificate diamond sales in the U.S.?

LUSSIER: It would be a bad thing for the industry if this happened. It’s a bad way to buy diamonds, but the industry has persuaded consumers that the only way to buy diamonds is by the 4C’s even though all diamonds with the same “4C’s” still may not be equal. But it could happen. Diamonds do lend themselves to buying that way if retailers don’t take the effort to market them more creatively. De Beers’ view is the Internet is a valuable information tool.

HASENFELD: Not the lion’s share, but a much bigger share than today. [The Internet] will be a market that jewelers must address. As the Internet becomes a household tool over the next decade, diamonds, like every other consumer and business item, will be traded more heavily on the Internet.

HAAS: There certainly is a niche for Internet diamond sellers, but I don’t believe that this channel will ever amount to more than a small fraction of total diamond sales. Most people are not yet ready to make such important purchases sight unseen and from anonymous vendors.

GOLDBERGER: They might capture some portion of the jewelry market, but I don’t know if people are going to buy loose diamonds over the Internet. If they are not dealing with someone on a personal basis, they won’t know whether the certificate is the same as the diamond they are getting. On the other hand, people who don’t know anything will buy anything.

RUSSELL COHEN: I hope not! I can envision this happening if we continue making diamonds into commodities. Even gas stations can sell them in that case.

The Internet is a tremendous source of information, and trading on it probably will place more pressure on margins than we already have because Internet sellers have very low costs. So we have to market our products and differentiate them, create added value.

BERG: I definitely do, and I think both wholesalers and retailers will sell certificated diamonds over the Internet. Both are very real possibilities. The fraud issue is the real problem. How do you deal with someone who is halfway across the country? And if you are a manufacturer or wholesaler, how do you ensure you get paid and not defrauded? Those are the issues, and I’m sure someone will eventually work them out.

PAUL COHEN: I think that the jury is still out. It all depends on how the traditional retail jeweler responds. There’s certainly plenty of opportunity for it to happen.

We have to think “outside the box.” Our generation has “computer phobia.” But the generation that’s growing up today is very comfortable with [computers] and, five years from now, the Internet will be another avenue for people to buy diamonds.

I see jewelers building alliances with brokers and cutters [to maintain their market share.] The “warm, fuzzy kind of feeling” you would get by being in a jewelry store in the ’70s may happen by being on the computer in the year 2000 or 2010.

“When De Beers markets jewelry with price points, the customer comes in with that in mind.” – Paul Cohen

Do you believe De Beers advertising makes a major impact on diamond demand?

LUSSIER: We at De Beers can point to billions of dollars’ worth of diamond sales directly tied to our programs, so we know they work. This is most apparent in newer markets. For example, three years ago in Shanghai virtually no brides received diamonds. Since we’ve been advertising, 30% of brides there received a diamond in 1996 and 1997.

HASENFELD: Yes, definitely. For example, just recently, they created demand for the diamond solitaire necklace. The Shadows ads also were very popular. They have created and sustained demand for diamonds for many years. Their advertising is very effective.

HAAS: There is no doubt that De Beers advertising has played a major role in the promotion of global diamond demand. Their most successful campaign was in Japan, which went from zero sales to the world’s second largest diamond market in less than two decades, largely as a result of De Beers’ marketing efforts.

GOLDBERGER: It does some. It could be better.

RUSSELL COHEN: Yes and no. If they do something in a concerted way, it can really have an impact. Look at the solitaire. It’s becoming a staple in a woman’s jewelry wardrobe. De Beers can have a greater impact. They’ve done a good job creating aspiration with expensive and fine qualities. We want to keep that but they can do more. [They should] broaden their scope to more [gift] occasions. In addition, the market continues to grow, but their spending isn’t keeping up with it. They are being outspent now by competing products. Hopefully they will pay more attention to the U.S. now that it’s the only solid market.

BERG: No question. They set the stage. They get females thinking about diamonds – in more cases than you will ever imagine. I’ve had consumers specifically talk about the Shadows campaign, or ask for a solitaire necklace, or mention the two months’ salary guideline. Obviously, their message is getting out, and it’s working.

PAUL COHEN: Absolutely! No question about it!

When DeBeers markets jewelry with price points, the customer comes in with that in mind. When they came up with the two months’ salary idea, clients came in with that dollar amount in mind.

“We can do more in America to bring more urgency to purchasing a diamond.” – Steve Lussier

How would you change De Beers’ diamond advertising if you could?

LUSSIER: We can do more in America to bring more urgency to purchasing a diamond, to take advantage of the good times there. But retailers must also take some initiative. They can create the urgency [with messages like] “There’s never been a better time to buy a diamond.” We can help them package it. Retailers’ concerns that we aren’t increasing spending above inflation are valid, though it must be remembered that we often have to maintain [worldwide] spending levels in very difficult markets.

HASENFELD: I think it’s fine. I’m in diamonds, not in advertising. I’ve seen their advertising presentations and I’ve always been impressed. They’re always able to spot emerging markets. My gut tells me they’re doing a great job.

HAAS: I am quite satisfied with the De Beers advertising program, especially the Shadows series, which has been extremely well received by the consuming public.

GOLDBERGER: The Syndicate (De Beers’ Central Selling Organisation) needs to separate the sectors of wholesaler and subcontractor completely differently. They need to try to find out who the manufacturers are who are running directly to the consumer.

RUSSELL COHEN: I can see no major changes, except focusing a bit more on where the discretionary dollars are – those over 55. We do a lot with them. Women’s self-purchase is also important, especially in the solitaires, so De Beers can expand on that as well.

BERG: I would like to see them partner more with retailers. I would love them to make more television ads available to retailers on an exclusive basis. Right now, I as a retailer can’t afford to produce my own television spots. If there were exclusive spots available, I would spend more money promoting diamonds on television.

PAUL COHEN: Why does one change success? I wouldn’t be inclined to change it. The free ride is kind of nice.

“I think a cut grade would be the final nail in the coffin.” – Lee Berg

Should the GIA adopt a cut grade on its grading reports, once its research on that subject is complete?

LUSSIER: We’ll leave that to Mr. Boyajian [GIA president]. But retailers’ opinions in our Carat Club meetings go both ways. Many say consumers want this information – in descriptive form more than a grade – and worry that they may lose out to those who do provide it. Others say cut is a subjective thing and difficult to evaluate scientifically. And, of course, many jewelers worry that the more information carried on a certificate, the more likely people will be able to buy diamonds on the Internet.

HASENFELD: It depends on what the [GIA] research results are. I suspect that the results will prove what cutters have been doing intuitively for years [that a number of different proportions can deliver similar brilliance and fire to an Ideal Cut]. In that case, I would back a cut grade.

But this question is really much more complex. What grades would be given to what kind of stones? How would the grade allow for different tastes of Italy, Hong Kong, Korea and the U.S.?

HAAS: The issue of cut grading has gotten caught up in a web of conflicting aims related to the search for a more profitable niche. I am certainly in favor of promoting high cutting standards, especially in light of the fact that excellence in cutting is the hallmark of the New York cutting industry. However, it is important to recognize that different markets favor different proportions, making it difficult for GIA to impose a single standard. I propose that we wait until GIA completes its research before we attempt to establish standards. This seems especially prudent in light of Bill Boyajian’s statements that the research to date indicates that there are proportions other than Tolkowsky’s which result in optimal brilliance and light return.

GOLDBERGER: No. GIA should not change anything on its certificates. It should unify with all the others who grade diamonds to support integrity in the business.

GIA diamond reports; “there’s no turning back.”

RUSSELL COHEN: I’d prefer not seeing one because it still gives us something we can talk to customers about. If we try to put too much information on a certificate, it will create an all-powerful document that will complete commoditization. We don’t want to lose the romance in technicalities and certificates. I’m not seeking to limit information to the consumer, I just want the opportunity to provide it myself.

BERG: I think a cut grade would be the final nail in the coffin. The way diamonds are purchased would change dramatically. It takes any subjectivity out of the purchases. It would negatively impact margins on both the wholesale and retail level. It would bring the business to the lowest common denominator, which is just price and a piece of paper.

PAUL COHEN: I don’t think they can quantify the brilliance with a cut grade so I don’t think they should. The heck with the quantifications. Just put down the facts. The table is X%, the crown angles are Y%, the girdle thickness is Z%. Why do we have to put a subjective beauty grade to that? F color is a description, SI1 clarity is a description. If GIA puts a cut grade on the report without providing the parameters, it’s just asking for trouble.

“I do not believe the clock can be turned back on either certificates or price lists.” – Eli Haas

How would your business be different today if there were no diamond grading reports and no Rapaport Report?

LUSSIER: It would probably be more profitable, but not as big. I’m thinking more about grading reports than Rapaport here. You cannot keep information from consumers today, not when 62 million pieces of diamond jewelry are sold. The reports have reduced the power of retail jewelers but have increased their sales by increasing confidence.

Rapaport gives a little information that appears to be a lot because not all diamonds graded the same way will fetch the same price because of subtle differences. This is why diamonds don’t really lend themselves to commoditization.

HASENFELD: Vastly! Margins would be much higher. Retailers would have more incentive to sell diamonds and sales would be much higher. Dealers and retailers would be able to move a wider range of stones. Today, retailers are fixated on narrow ranges of goods because of all the specificity in reports and price lists. There would be fewer shortages. Prices would not be as volatile.

But you can’t put the genie back in the bottle. Just like computers and cellular phones, price lists are here to stay.

HAAS: I don’t believe the clock can be turned back on either certificates or price lists. If there were no GIA or Rapaport, the vacuum would be filled by others. Certainly the diamond business would be less tightly structured without them.

GOLDBERGER: A little different. Not any “schlemiel” would be in the business. We would be relying on integrity again. Forty years ago we had to put up the money to start our business. Now, they don’t have to do that. And the diamonds would be different. Now, they are not well made. Some are sold at 50 below Rapaport, some at 40 below… there’s no steady price for diamonds.

RUSSELL COHEN: It’s unlikely we wouldn’t have these in any case. But without them, there would be more importance to relationships between consumer and retailer and retailer and supplier. Trust and confidence are less important now, and the Rapaport Report and other price lists are confusing because there are too many variables affecting price and grade. Untrustworthy people can always get around certificates by selling diamonds that don’t go with the reports they have, or altering certs.

BERG: I would probably be making more money, my margins would be better. Consumer confidence might be lower; the consumer would have to seek out jewelers who are reputable in their communities.

This isn’t hard to imagine. All I have to do is flash back to the business 20 years ago and remember what margins used to be. But what good does it do to talk about the past? It’s never coming back again. Where we are is where we are – I would much rather worry about where we are going to be.

PAUL COHEN: It’s difficult to go back 50 years, but I may have some related stories. Back then, consumers picked a diamond based on the recommendation of the jeweler, and the consumer trusted the jeweler. Would consumers be less price sensitive without certificates? Would they focus more on service, romance? Grading diamonds has commoditized them, and we have to be price-conscious.

Rapaport? No, he’s not had a negative impact on the industry.

“Too many people are taking goods on memo, selling them and not paying the supplier or, worse, filing Chapter 11.” — Ernie Goldberger

If you could make one single major change in the diamond business today, what would you do?

LUSSIER: Increase consumer demand in Japan. The diamond business is global, and problems affecting one area impact another.

HASENFELD: Get rid of price lists, for the reasons stated above.

I also think that the market should make fluorescence a non-issue. I think the reason that fluorescence is discounted is nonsensical. If you read the latest Gems and Gemology, you realize that fluorescence is a non-issue; I just wish the market would realize it. I haven’t seen one solid reason that fluorescence should be discounted. For some reason, during the investment days, fluorescence started being discounted. It’s a myth, and I wish the myth would go away.

HAAS: The most significant factor missing from the diamond business today is that of viable profitability at every level of the distribution pipeline. Years of marginal profitability have sapped the strength of the industry to weather downturns, especially one as severe as the sudden collapse of the Asian markets. My hopes for the future of all segments of the diamond industry – cutters, wholesalers and retailers alike – are for a return to healthy profitability and sustained growth.

GOLDBERGER: Eliminate 50% of the “runners” from country to country. I’m not talking about the legitimate guys who have offices here and there. But when business is bad in Hong Kong or somewhere, they come running over here to dump their goods. The Syndicate should look into it. It’s not healthy. The diamond business should be professional. If somebody wants to dump their goods, let the Syndicate buy it back at 10%-15% so it remains in control.

Memo business isn’t good. Too many people are taking goods on memo, selling the goods and then not paying the supplier, or worse, filing Chapter 11. We should unite, so that nobody takes the diamonds until they are paid for.

RUSSELL COHEN: In the long term we must ensure diamonds do not become a commodity. If this happens, the traditional reasons for buying diamonds – celebrating happy occasions like engagements, anniversaries and even self-reward – will be lost. This hasn’t happened yet, but we must guard against it.

BERG: The biggest problem in the business now is integrity. I would change the ability to market the product on a retail level. There would be a certification process for retail jewelers, and the consumer would be steered to those people. And they would be people who represent the product exactly like it should be represented.

That would return our industry to the image it used to have. Jewelers used to be in the category of other professionals – such as accountants and engineers – and looked upon as people with high ethics and morals. But that won’t happen in my lifetime.

PAUL COHEN: I would like to have direct access to the mines and the cutters so I could cut my own goods. And, if all facts were disclosed accurately, then everyone will be on a level playing field. Then we’d have to compete using service, character and personal handling of the customer.